Monthly Archives: July 2013

July 31, 2013

Survey Results: Loan Prohibitions & Cashless Exercises

Here are the latest survey results about loan prohibitions & cashless exercises:

1. For cashless exercises of stock options, due to Section 402 of Sarbanes-Oxley, we:
– Don’t allow Section 16 insiders to conduct cashless exercises at all – 10%
– Don’t allow Section 16 insiders to conduct cashless exercises through our plan’s captive broker (so they have to use their own broker) – 7%
– Don’t allow executive officers to conduct cashless exercises through our plan’s captive broker but do allow directors to – 2%
– Allow Section 16 insiders to conduct cashless exercises through our plan’s captive broker – 81%

Please take a moment to participate in this “Quick Survey on Exclusive Forum Bylaws” and “Quick Survey on Annual Meeting Conduct.”

More Companies Acting on Exclusive Forum Bylaws Before Appeal

Speaking of the “Quick Survey on Exclusive Forum Bylaws,” Michelle Leder of counts 7 companies since the beginning of July who have made a change to their bylaws to add an exclusive forum provision, including Integrated Device Technology and JC Penney.

Interesting that companies are acting despite the fact that the forum selection bylaws case has been appealed – although the survey results bear this out so far with 54% of the respondents indicating they intend to adopt this type of bylaw soon rather than wait for the Delaware Supreme Court to weigh in. A number of the memos posted about the Boilermakers v. Chevron decision include a model bylaw…

It’s Done: 2014 Edition of Romanek’s “Proxy Season Disclosure Treatise”

We have wrapped up the 2014 Edition of the definitive guidance on the proxy season – Romanek’s “Proxy Season Disclosure Treatise & Reporting Guide” – and it’s done being printed. You will want to order now so that you can get your copy as soon as you can. With over 1350 pages – spanning 30 chapters – you will need this practical guidance for the challenges ahead. Order now.

– Broc Romanek

July 30, 2013

Board Tenure: The New Hot Governance Topic?

At a recent event, a member joked with me that his CEO was asked: “What was the average age of directors on his board?” – and the CEO answered: “Dead.” Based on recent stats, it appears that many directors are comfortable as turnover is quite low these days. This is reflected in Jim Kristie’s Directors & Boards piece entitled “Troubling Trend: Low Board Turnover.” As Jim points out, a director with a certain background might make sense for the company now – but might not ten years down the road as the circumstances change.

Perhaps even more important is the independence issue – is a director who sits on the board for several decades likely to still be independent after such a long tenure (see this WSJ article about the 40-year club)? Does it matter if management turns over during the director’s tenure? And if so, how much? These are issues that are being debated. What is your take?

As blogged by Davis Polk’s Ning Chiu, CII is considering policy changes linking director tenure with director independence, under which it would ask boards to consider a director’s years of service in determining director independence. According to the proposed policy, 26% of all Russell 3,000 directors have served more than 10 years and 14% have served more than 15 years. CII would not advocate for any specific tenure, unlike the European Commission, which advises that non-executive directors serve no more than 12 years. Note that under the UK’s “comply or explain” framework, companies need to disclose why a director continues to serve after being on the board nine years. I have heard that seven years is the bar in Russia.

How Does Low Board Turnover Impact Board Diversity?

Related to proper board composition is the issue of whether low board turnover is just one more factor that stifles board diversity. As well documented in numerous studies (see our “Board Diversity” Practice Area), gender diversity on boards has essentially flat-lined over the past decade – and actually has regressed in some areas. This is a real-world problem as it’s been proven that differing views on a board lead to greater corporate performance. To get boards back on track, I do think bold ideas need to be implemented – and plenty are out there, such as this one. I can’t believe that more investors haven’t been clamoring for greater diversity – but I do believe that day is near…

Meanwhile, check out the nifty artwork from the cover of this issue of Directors & Boards:

board diversity.jpg

Should Directors Talk to the Press?

Written from the perspective of a journalist, this article clamors for more directors to talk to the press. The author believes that directors are reticent to open up because of fear of being misquoted or uninformed. Apparently, the author is not aware of Regulation FD, which was adopted in 2000 – three years after his example of when a director was helpful to him in reporting a story. [Of course, Reg FD doesn’t apply to communications to the news media, but FD does cast a big shadow.]

– Broc Romanek

July 29, 2013

Here We Go Again: “One Share, One Vote” Proposal

As noted in this press release, Senator Elizabeth Warren has asked – via this letter – the NYSE and Nasdaq to adopt rules that would require listed companies to adopt “one share, one vote” policies. Old-timers will have flashbacks of controversial Rule 19c-4 – which was adopted in 1988 to limit the ability of companies to deviate from “one share, one vote” – and which was struck down in 1990 by the District of Columbia Court of Appeals in Business Roundtable v. SEC.

As noted in this Cooley alert:

As you may know, it’s become fairly common practice for companies conducting an IPO to set up a corporate structure with Class A/Class B common. One class, typically help by founders and management, has ten to one voting rights, which generally allows that class to control the outcome of voting on most matters submitted to stockholders. Because the prevalence of unequal voting rights has increased, if adopted, the proposal could have a significant impact on current practices.

The proposal would make companies that seek an initial listing ineligible if they have two or more classes of common stock with unequal voting rights and prohibit already listed companies from issuing additional classes of common with unequal voting rights. Warren argues that, with unequal voting rights, ordinary investors, including workers and retirees, “have limited recourse in holding management and the board accountable if the company heads in a wrong direction. In addition, unequal voting helps entrench management and a board that can enrich themselves at the expense of the general investors.” She notes that many mutual fund providers, such as Fidelity and Vanguard, oppose the introduction of new classes of stock with unequal voting rights.

Wildest Idea of the Year? Creating a “Vote Buying” Framework

I agree with the start of this Financial Times article entitled “Shareholder democracy needs people to pay for their votes” about how the proxy plumbing is broken and needs to be fixed (a project that the SEC started but that got stalled due to constant Congressional mandates in other areas). But that is as far as I got before I started scratching my head.

Two Professors from the U. of Chicago – Eric Posner and Glen Weyl – have used their economic backgrounds as a way to devise a solution to shareholders who are too lazy to vote or too ill-informed when they vote as noted in their study. So the essence of their idea is to force shareholders to buy votes so that only “interested” parties have a right to vote – owning shares would only provide a shareholder with a right to profits.

There are things in the article that I disagree with – including the end when they say the “corporate governance movement has been spinning its wheels for decades and has little to show for its efforts.” I can say with great certainty that before Sarbanes-Oxley in 2002, only a handful of people ever heard of the term “corporate governance” – including most corporate lawyers and even corporate secretaries. Reform really is only in its infancy.

Corporate elections have only just started to become more “real” in the last year or so. We may have already found at least part of the solution as more institutions spend the resources necessary to be informed. Flash forward five years and who knows what the proxy season landscape will look like – it really is changing that fast, reflected by this NY Times article about how BlackRock is becoming more active (or watch my video about BlackRock). And that’s true even if no additional reforms are enacted.

My bottom line is that I just don’t see vote buying as an idea that will catch on. I believe it could wind up with individuals or small groups (eg. corporate raiders) controlling many outcomes, some of them pretty extreme. And I’m not convinced that having some shareholders who don’t vote or read proxy statements as being that bad a thing. As it stands now, the percentage of shareholders who vote during corporate elections is far higher than what happens in the political world, albeit partly due to a position taken by the Department of Labor many years ago (ie. proxy voting is a fiduciary act).

More Thoughts About “Vote Buying” Frameworks

And Professor Lyman Johnson shares his thoughts about the Posner-Weyl proposal:

1. Beyond Professor Bainbridge’s rightful skepticism about legislative adoption, to the extent shareholders control bylaws (ultimately in the Model Act they do – and likely in the Delaware Code), which shareholders have an incentive to disempower themselves vis a via those with lesser holdings? To what degree? So such a provision in the statute alone as an option is inadequate and it would not be adopted as a default rule.

2. On a historical note, the antecedent to this proposal lies in the very old practice of granting one vote per shareholder rather than one vote per share as now is the norm. The proposal doesn’t go all the way to such equality – but it moves in that direction. The older practice was scrapped, so a compelling case must be made as to why a variation on it should now be restored.

3. If such a rule were in place, do we know how investors who favored various transactions would behave to dampen its effect? For example, rather than buying 64 shares pre-transaction to get 8 votes, perhaps buying 144 shares to get 12 votes to combat the votes of smaller holders will suffice. And so on. (Doubtless others can devise better examples). Thus, I raise the usual problem of the market workaround of a rule change that seems sufficiently unknowable ex-ante to warrant change.

– Broc Romanek

July 26, 2013

Corp Fin Chief Counsel Tom Kim: Beyond a Short-Timer

After nearly six years of service as Corp Fin’s Chief Counsel (& Associate Director), Tom Kim has left the SEC to return to private practice. Tom was one of the SEC’s best and brightest, overseeing the venerable Chief Counsel’s office during a time of great change. Tom leaves having accomplished the rare legal job trifecta (government/in-house/law firm), having also worked in SEC Chair Cox’s office, for General Electric and Latham & Watkins. Tom is using up some of his vacation days before officially departing the agency.

Survey: Most Companies Not Ready for Conflict Minerals Compliance

With the SEC’s conflict minerals rules seemingly in limbo until the court decision this week, perhaps a PwC survey – discussed in this WSJ article – showing that most companies are not ready to comply is not surprising – but it is scary based on the consensus in the memos about the court decision that any appeal will take some time. Here are stats from the PwC survey pulled from this Elm Consulting blog:

– 26% of the respondents did not know if the rule was even applicable to their companies.
– 58% of respondents see this only as a compliance exercise and don’t anticipate additional value from the required efforts.
– 26% of respondents have not established a conflict minerals policy or feel it isn’t applicable.
– For those that have gathered some data on their suppliers, 54% of the respondents could not determine if minerals originated from covered countries or not.
– Almost 27% of respondents plan on relying solely on due diligence information received from suppliers; 58% don’t know if they will extend their efforts beyond their Tier 1 suppliers.
– For data management, 76% of respondents have not determined if they will implement a conflict minerals specific IT solution; almost 9% plan on using an existing system for their conflict minerals data.
– 44% of respondents expect to file a Form SD, but only 8% expect to also file a Conflict Minerals Report, or CMR (required where a company knows, or has reason to believe, that minerals originated from the Covered Countries).
– 9% of respondents expect that their CMR will be audited in 2013 (we are not sure why this number is greater than the number of respondents who think they will issue a CMR to begin with); 26% of respondents expect to defer the audit because they anticipate being classified as “undeterminable” for 2013.
– 25% of respondents appear not to have developed their internal team and don’t know how needs to be involved.
– 34% of respondents don’t know how many direct suppliers are in their supply chain; 23% have between 100 – 1000 and 17% have less than 100.

Director Roles in Going Private Deals

In this podcast, Matt Orsagh of the CFA Institute talks about the SEC’s recent enforcement case in which it charged and fined Revlon for misleading shareholders – as well as the company’s independent directors – as a result of a “going-private” transaction:

– What was the SEC’s recent Revlon enforcement action about?
– How can independent directors break down informational barriers during “going-private” transactions?
– Why are so many boards short-term focused – actively or passively?
– How should boards communicate with shareholders about these types of transactions?

– Broc Romanek

July 25, 2013

Just Added! Corp Fin Director Keith Higgins to “Proxy Disclosure Conference” Lineup!

We are very excited to announce that Corp Fin Director Keith Higgins will be part of our “Annual Proxy Disclosure Conference” on September 23rd. Registrations for our upcoming pair of conferences (combined for one price) – in DC and via video webcast – are strong and for good reason. The full agendas for the Conferences are posted – but the panels include:

– Keynote: “Keith Higgins, Director, SEC’s Division of Corporation Finance”
– Keynote: “Former Congressman Mike Oxley”- Q&A with ISS
– Q&A with Glass Lewis
– Say-on-Pay Shareholder Engagement: The Investors Speak
– Compensation Committees & Advisors: The NYSE & Nasdaq Speak
– Realizable Pay Disclosure: How to Do It
– How to Improve Pay-for-Performance Disclosure
– We Don’t Have a Good Pay Story: What Do We Disclose?
– How to Avoid Executive Pay Disclosure Litigation
– Peer Group Disclosures: What to Do Now
– In-House Perspective: Strategies for Effective Solicitations
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– The Art of Supplemental Materials
– Dealing with the Complexities of Perks
– Say-on-Parachute & Post-Deal Disclosure Developments
– Compensation Accounting, Tax & Risk Assessment Disclosures
– Shareholder Proposals & Executive Pay
– The Rise of Political Contribution Disclosures

Dodd-Frank’s Whistleblower Protections: First Appeals Court Weighs In

As noted in the memos posted in our “Whistleblowers” Practice Area, the Fifth Circuit became the first appellate court to deliver an opinion on the Dodd-Frank whistleblower rules (Asadi v. G.E. Energy(USA)) – finding that a whistleblower can be protected only if they provide information to the SEC. It is noteworthy that some district courts have ruled differently.

Since the SEC’s new Reg D rules were published in the Federal Register yesterday, they become effective on September 23rd (60 days thereafter)…

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season Blog” for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– For Proxy Advisers, Influence Wanes
– The Battle Over Shareholder Written Consent Bylaws
– More on “Shareholder Proposals: Goldman Sachs for President!”
– How Voting Rights in Corporate Elections Get Compromised Worldwide
– Waning Support for Some Shareholder Proposals
– Activists Unite to Obtain Majority Support for “Split the Company” Shareholder Proposal

– Broc Romanek

July 24, 2013

The SEC Wins a Case! Conflict Minerals Rules Survive!

Breaking a long streak of losing major cases, the US District Court for DC issued this opinion yesterday rejecting the summary judgment motion of the plaintiffs (Chamber of Commerce and NAM) – and upholding the SEC’s (& intervenor Amnesty International’s) cross-motion for summary judgment.

This means that the SEC’s rules go forward as they currently exist (ie. no de minimis exception, etc.). Even if the plaintiffs appeal, with the first report due May 31, 2014, all companies should be operating on the assumption that the rules are indeed the rules and start preparing now. We are posting memos in our “Conflict Minerals” Practice Area.

Section 16 Filings Facelift: The SEC’s New Edgar Search Page

Last month, I blogged that the SEC’s new Edgar search page received its first facelift in a decade. Now the tool has been further refined so that searches can easily include – or exclude – Section 16 filings. Simply click the “More Options” option that appears underneath the search box. Nice!

Check out Alan Dye’s Blog for analysis on how the Supreme Court’s recent DOMA decision might impact Section 16 filings…

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Congress to FASB: “Do As I Say, Not As I Do”
– Facebook IPO Derivative Ruling: Cure for Multiforum Madness?
– Don’t You Love It When Officers Swear During Earnings Calls!
– Chancellor Strine Proposes New Approach to Multijurisdictional Shareholder Litigation
– Study: XBRL Might Be Irrelevant to Investors & Analysts
– No “Dummy Directors”: DE Court Refuses to Dismiss Loyalty Claims Against Outside Directors for Failure to Monitor
– Freedman vs. Novell: The Latest Adventures of the Business Judgment Rule
– Survey: JOBS Act Has No Major Impact on IPO Market (So Far)

– Broc Romanek

July 23, 2013

Broadridge Changes “Interim Vote Reporting” Position

As noted in this Broadridge Steering Committee newsletter:

On May 15 and June 17, the Steering Committee reviewed the decision made by Broadridge on May 10 to cease its practice of releasing preliminary shareholder voting information to those proponents of shareholder proposals who had requested Broadridge, as agent of banks and brokers, to distribute their soliciting material to shareholders.

In 2011, the Steering Committee had reviewed Broadridge’s practice of sharing voting trend information with dissident shareholders. At that time the Committee found that, so long as the recipients of the early voting data signed confidentiality agreements and in the absence of objections from the brokers and banks to whom the voting information belonged, the Committee had no objection to the practice.

In May of this year, however, circumstances changed. The brokers conveyed to Broadridge their concerns about the early release of their voting data. Broadridge stressed its neutrality on the merits of whether or not brokers’ early vote totals should be released, but stated that, as an agent, it was contractually bound to follow the directions of its principals, the brokers. Some members of the Steering Committee, while acknowledging that Broadridge’s contracts required it to obey its clients’ instructions, questioned the timing of the change, that is, whether Broadridge could have postponed its decision until after the current proxy season. Broadridge responded that as the brokers did not give them latitude to delay the decision, they were required to terminate the practice immediately.

A number of members of the Steering Committee suggested that the SEC was the proper body to provide clarity on this issue going forward. The Committee stated that it would continue to monitor developments on this issue.

Learn more in this article about VIFs and vote reporting…

What Does a SEC Impersonator Look Like?

Over the past few years, the SEC periodically has issued an investor alert warning about government impersonators (here is one and another). Apparently, these impersonators use fraudulent solicitations purporting to be affiliated with – or sponsored by – the SEC. There even has been a recent bogus email scam using the name of Commissioner Gallagher!

So who do you like for the movie? For some reason, I keep thinking Matthew McConaughey would be perfect for the role, particularly using much of his character from last year’s “Magic Mike”…

Transcript: “Law Firms & Independence: What to Do Now”

We have posted the transcript for the recent webcast: “Law Firms & Independence: What to Do Now.”

– Broc Romanek

July 22, 2013

A New Type of Earnings Call: The Video Discussion

Today, Netflix will forego the traditional conference call format for its earning call. As noted in this article, the company instead will host a live streaming video on its IR web page that will consist of an analyst and reporter asking management questions. These questions will be pulled from a pool of questions sent in advance by email and via Twitter. So this format is partly Warren Buffett inspired (reporters asking questions submitted by others) and partly inspired by Zillow (questions sent in via Twitter). As you will recall, Netflix’s CEO Reed Hastings has been at the forefront of leveraging social media – resulting in the SEC’s Section 21(a) report on social media.

This follows Yahoo!’s earnings call, which was conducted via video last week, as noted in this WSJ article and IR Magazine piece. Here’s the forward-looking disclaimer for the video. Yahoo! live-tweeted the call – as well as posted pics of CEO Marissa Mayer getting ready beforehand.

It will be interesting to see if this concept of leveraging video catches on with other large or media companies…

Check out this cool Expedia’s quarterly earnings infographic.

SEC’s Inspector General Issues Two Reports on Rulemaking Economic Analysis

With cost-benefit analysis of rulemaking continuing to be a hot topic across the federal government – particularly the SEC – it is noteworthy that the SEC’s IG issued two reports in this area that were posted on Friday. This report concerning the implementation of current economic analysis contains one recommendation – and this report on the current use of this analysis contains six recommendations.

Speaking of reports, the GAO has issued this report on conflict minerals sourcing – and this report on the definition of “accredited investor.”

Transcript: “E-Proxy Practice Tips: Five Years Later”

We have posted the transcript for our recent webcast: “E-Proxy Practice Tips: Five Years Later.”

– Broc Romanek

July 19, 2013

Sights of the Society of Corporate Secretaries Conference

Heading into last week’s annual conference for the Society of Corporate Secretaries, I blogged about my video on “how to attend conferences” – and I said I would take my own advice and meet ten new people. Here are pics from conference with the ten new people that I met (note the hand signs indicating the # of each person):

Todd Hamblet of Covington & Burling:

society - todd.jpg

Joe Campbell of Computershare:

society - campbell.jpg

Todd Gilman of TrueBlue:

society - todd 2.jpg

Karen Martin, wife of the Society’s David Martin:

society - karen.jpg

Melissa Caen of Southern Company:

society - melissa.jpg

Craig Brown of MasterCard:

society - mc.jpg

Tim Olson of Northwestern Company & Cathy Conlon of Broadridge:

society - cathy.jpg

Caryn Feinberg of SecondMarket:

society - 9.jpg

Kate Karas of SecondMarket:

society - kate.jpg

Thanks to American Stock Transfer/AST for a great party on Wednesday! Here is the view:

society - ast.jpg

And thanks to Broadridge for the dinner on Thursday. Here I am with Maryellen Anderson:

society - me.jpg

Finally, kudos to Microsoft (John Seethoff/Peter Kraus/Stacy Anderson) for the rocking give-away hats!

society - hat.jpg

– Broc Romanek

July 18, 2013

Rumor! SEC to Propose Pay Disparity Rules Soon

With the three year anniversary of Dodd-Frank bearing down on us tomorrow comes this rumor – from this Bloomberg article – that the SEC is close to proposing pay disparity rules – perhaps as soon as August 21st! Normally, I don’t blog about rumors since they often don’t come true – but new SEC Chair White has promised to move the Dodd-Frank rules along and last week’s Reg D rulemaking proves that she means business. So perhaps we will see an entire set of the “Gang of 4” proposals soon enough.

Meanwhile, as noted in this Ning Chiu blog, there has been a bit of press about the pay ratio requirement in Dodd-Frank – as well as a House bill to stop it.

Registrations for our upcoming pair of conferences – in DC and via video webcast – are strong and for good reason. The full agendas for the Conferences are posted – but the panels include:

– Q&A with ISS
– Q&A with Glass Lewis
– Say-on-Pay Shareholder Engagement: The Investors Speak
– Compensation Committees & Advisors: The NYSE & Nasdaq Speak
– Realizable Pay Disclosure: How to Do It
– How to Improve Pay-for-Performance Disclosure
– We Don’t Have a Good Pay Story: What Do We Disclose?
– How to Avoid Executive Pay Disclosure Litigation
– Peer Group Disclosures: What to Do Now
– In-House Perspective: Strategies for Effective Solicitations
– The SEC Staff Review Process
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– The Art of Supplemental Materials
– Dealing with the Complexities of Perks
– Say-on-Parachute & Post-Deal Disclosure Developments
– Compensation Accounting, Tax & Risk Assessment Disclosures
– Shareholder Proposals & Executive Pay
– The Rise of Political Contribution Disclosures

More on Corp Fin’s Conflict Minerals FAQs

In addition to the horde of memos on the SEC’s recent FAQs on conflict minerals, you should read this Cooley news brief about informal Corp Fin guidance on the CDI dealing with timely filing for a Form SD and S-3 eligibility – and this Elm Consulting blog about the CDI regarding the need to file a Form SD or obtain an audit even if the company is supporting conflict-free sourcing…

According to this WSJ article, a PwC survey notes that companies are not making a whole lot of progress on conflict minerals: “Two-thirds of respondents to a new survey say their companies are in the early stages or have not yet started compiling information needed to meet the requirements of the Securities and Exchange Commission’s conflict minerals reporting law…. One-third of the nearly 900 executives surveyed said they still are trying to figure out if the reporting requirement applies to their businesses, according to the survey released Wednesday by PwC. Less than 5% said their companies have gathered most of the required information from their suppliers and have begun assessing it.”

July-August Issue: Deal Lawyers Print Newsletter

This July-August issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– The Merger Tarantella: Considerations in Post-Merger Corporate Governance
– The In-House Perspective: Post Merger Governance
– Activist Shareholders in the U.S.: A Changing Landscape
– Appraisal Rights: The Next Frontier in Deal Litigation?
– The Standard of Review in Going Private Transactions: Delaware’s Long Awaited Clarification

If you’re not yet a subscriber, try a “Rest of ’13 for Half-Price” no-risk trial to get a non-blurred version of this issue on a complimentary basis.

– Broc Romanek